Sunday, September 13, 2009

Can we disincentivize unintended consequences?

I posted most of this as a comment to Richard's post, but like a Grizzly caught in a revolving door, it bears repeating.

One of the first things you learn in Econ. 101 is the Law of Unintended Consequences. According to Rob Norton in the Concise Encyclopedia of Economics, "The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended."

How does that help us!?

It reminds me of that shirtless guy you see on the TV show Cops. You know the guy who is being handcuffed and tossed into the back of the police cruiser muttering, "I just knew something like this would happen." I mean, he knew something would happen, but then so do the economists. They just didn't know what.

It's possible that I don't know all there is to know about the law of unintended consequences. In my opinion the law of unintended consequences is saying something like this. "Good Luck, Smart Guy!" It's as if Chaos Theory drank a six pack of Red Bulls, picked up his old buddy Murphy's Law, and drove toward his ex-girlfriend's house: first stop, the liquor store.

At least we're trying, right? I liked the part of Whitman's article where he mentioned the difference between the "Guy on Cops" and a "Lousy Economist". "A person with little or no economics training often ignores incentives entirely, by treating people like robots who just respond to their programming. They keep on doing what they're doing, however much we alter their surroundings. A lousy economist regards people as more sophisticated robots. They change their behavior in response to changes in their incentives, but only in specified and highly predictable ways."

He then goes on to talk about the task of a good economist. "A good economist realizes that human beings are imaginative and clever. They change their behavior in response to incentives in both predictable and unpredictable ways, constantly seeking to improve their lives in light of new conditions." In all the examples of incentives gone un-intendedly wrong mentioned in the article, buying back slaves, rent controlled apartments, Italian basement viper breeding, and gun buy-backs, the economists were always a step behind. (We predicted that we'd be behind, we just didn't know how far.) Thank Saint Gosh, we didn't have to recommend any economic policies to deal with slave owning, gun toting, viper breeding Italians living in rent controlled apartments. We might have ended up in the back of that police cruiser with the muttering shirtless guy.

Heyne's "The Economic Way of Thinking" really brings it home for us in chapter one. "It's important to realize, however that economic theory by itself cannot answer any interesting or important social questions. The economic way of thinking has to be supplemented with knowledge drawn from other sources: knowledge about history, culture, politics, psychology, and the social institutions that shape people's values and behavior."

I wish us all luck, we have our work cut out for us.

1 comment:

  1. You're rightly skeptical of the predictive power of The Law of Unintended Consequences. It's simply not possible for someone to anticipate every possible outcome resulting from a government policy, individual action or market intervention. But I would argue that the principle of unintended consequence is still important and useful if only because it puts us in a state of mind that encourages us to think very hard about the wide variety variables that might potentially effect our economic models. We don't necessarily have to predict the correct outcomes 100% of the time, but by being mindful of the vast complexity of the market and the unpredictability of its agents we can better understand why things rarely turn out the way we expect and what we might try differently next time to get the results we want.